Cardinal Health, Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended September 30, 2020; fiscal year ends June 30. Comparisons are with the three months ended September 30, 2019 unless noted.
Business context and results
Cardinal Health is a healthcare services and products company reporting Pharmaceutical and Medical segments. Revenue increased 5% to $39.065 billion, primarily from pharmaceutical distribution and specialty pharmaceutical customers.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $39.065 billion | $37.341 billion |
| Gross margin | $1.715 billion | $1.679 billion |
| GAAP operating loss | $624 million | $5.264 billion |
| GAAP net loss attributable to Cardinal Health | $253 million | $4.922 billion |
| GAAP diluted loss per share | $0.86 | $16.65 |
| Non-GAAP operating earnings | $618 million | $577 million |
| Non-GAAP diluted EPS | $1.51 | $1.27 |
Non-GAAP measures exclude specified items, including opioid litigation charges, and should be considered alongside—not instead of—GAAP results.
Segments, margins, and cash flow
- Pharmaceutical: Revenue rose 5% to $35.112 billion; segment profit increased 1% to $402 million. Branded mix helped, while COVID-19-related volume declines in generics and Nuclear and Precision Health Solutions weighed on results.
- Medical: Revenue rose 1% to $3.957 billion; segment profit increased 36% to $230 million, mainly from cost savings and manufacturing efficiencies. Management estimated a minimal net COVID-19 impact in the quarter.
- Gross margin increased 2%, but gross margin rate declined 11 basis points, mainly due to pharmaceutical distribution product mix. SG&A rose 3% to $1.137 billion, including a $41 million New York opioid assessment.
- Operating cash flow was $270 million, versus cash used of $653 million a year earlier. Capital expenditures were $78 million; dividends paid were $146 million. Cash and equivalents ended the quarter at $2.746 billion, down from $2.771 billion at June 30, 2020.
Debt and liquidity
Total long-term obligations, including current portions and other short-term borrowings, were $6.7 billion at September 30, 2020, compared with $6.8 billion at June 30. The company repurchased $37 million of notes due in 2022. It had no amounts outstanding under its $2.0 billion commercial paper program, $2.0 billion revolving credit facility, or $1.0 billion receivables sales facility, and reported compliance with financial covenants. Management said available capital resources and projected operating cash flow were adequate for expected needs, obligations, dividends, repurchases, and potential opioid settlement payments.
Material changes, outlook, and risks
- The prior-year comparison is substantially affected by opioid litigation charges: $1.02 billion pre-tax in Q1 FY2021 versus $5.63 billion in Q1 FY2020. Cardinal Health reported $6.59 billion accrued for certain opioid litigation at September 30, 2020.
- Negotiations on a proposed settlement framework remained ongoing; definitive terms and required participation were uncertain. If finalized, management expected most payments to be spread over 18 years, but could not predict when payments would begin. The framework does not cover private plaintiffs. The company disputes the allegations and says the accrual may differ materially from the ultimate loss.
- Management anticipated that COVID-19 would further reduce FY2021 consolidated operating earnings and Pharmaceutical and Medical segment profit, but could not estimate the pandemic’s duration or severity. No numerical earnings guidance is provided in the filing text.
- The effective tax rate was 61.8%, versus 7.9% a year earlier. Management said the opioid-charge tax treatment increased the current-quarter tax benefit by approximately $450 million relative to what otherwise would have been recognized, and expected a significantly higher income tax provision during the rest of FY2021. Tax deductibility estimates and related uncertain tax positions require significant judgment.
- Other notable contingencies include Cordis IVC filter litigation, for which $494 million net of estimated insurance recoveries was accrued; the company estimated the high end of the loss range at approximately $961 million net of estimated insurance recoveries. It also faces shareholder, product, pricing, and other litigation, and is responding to DOJ subpoenas concerning controlled-substance distribution and anti-diversion practices.
Important facts for investors to verify
- Progress toward a definitive opioid settlement, including payment terms, participation, timing, and whether the $6.59 billion accrual remains adequate.
- COVID-19 effects on segment volumes, margins, supply costs, and full-year operating performance.
- Tax treatment and cash-tax consequences of opioid-related accruals, including the expected FY2021 tax provision.
- Operating cash conversion, working-capital movements, debt levels, and continued compliance with leverage covenants.
- Developments in Cordis, private opioid, DOJ, and other litigation and investigations, including potential effects beyond recorded accruals.